In testimony before the House Budget Committee Bernanke said that the economy will continue to grow at a moderate pace, with expectations of GDP growth of 3.5% over the course of 2010. However that growth rate will mean a slow reduction in the unemployment rate which would keep inflation subdued. Those factors will likely keep the Fed on the sidelines in terms or raising interest rates. A strong May non-farm payroll report may have pushed up the timetable for a rate increase, but that was not the case.

While stimulus spending is due to wind down, Bernanke cites increases in consumer spending and increases in spending by businesses on equipment and software.

Real consumer spending has risen at an annual rate of nearly 3-1/2 percent so far this year, with particular strength in the highly cyclical category of durable goods. Consumer spending is likely to increase at a moderate pace going forward, supported by a gradual pickup in employment and income, greater consumer confidence, and some improvement in credit conditions. In the business sector, real outlays for equipment and software posted another solid gain in the first quarter, and the increases were more broadly based than in late 2009; the available indicators point to continued strength in the second quarter. Looking forward, investment in new equipment and software is expected to be supported by healthy corporate balance sheets, relatively low costs of financing of new projects, increased confidence in the durability of the recovery, and the need of many businesses to replace aging equipment and expand capacity as sales prospects brighten.

On the downside, the housing market will weigh down growth, especially as commercial real estate is weak and a government home-buyer tax credit has run out.

In the housing market, sales and construction have been temporarily boosted lately by the homebuyer tax credit. But looking through these temporary movements, underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit. Spending on nonresidential buildings also is being held back by high vacancy rates, low property prices, and strained credit conditions.

The labor market has begun to see some modest improvement recently in employment, hours of work, and labor income. However a significant amount of time will be required to restore the nearly 8-1/2 million jobs that were lost over 2008 and 2009. Inflation continues to be subdued, and measures based on nominal and indexed Treasury yields have decreased somewhat of late, but at least part of these declines reflect market responses to changes in the financial situation in Europe.

On the issue of Europe, its impact on US growth is likely to be modest if financial markets continue to stabilize... Our ongoing international cooperation sends an important signal to global financial markets that we will take the actions necessary to ensure stability and continued economic recovery.

The actions taken by European leaders represent a firm commitment to resolve the prevailing stresses and restore market confidence and stability. If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest. Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities. The Federal Reserve will remain highly attentive to developments abroad and to their potential effects on the U.S. economy.

Bernanke finished his prepared testimony by calling on lawmakers to begin laying the groundwork for tackling the record federal budget deficit.

To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.

The Chairman's comments, similar to his comments to start the week, may calm some worries about a double-dip recession in the US. Traders and investors last week had begun increasing their bets that the global economy may sputter as a result of the Euro-zone sovereign debt crisis and the weak private sector hiring in the US. Today's news that China's exports will post a strong figure for May helped cool those fears as well.

US equities rallied for a second day, with the Dow Jones Index moving above the 10K level. Oil prices were also strongly up, both as a result of a weaker Dollar but also as a weekly report showed a drop in oil inventories in the US. The nation's stockpiles fell by 1.8 million barrels in the week ended June 4th.

We'll see how long this recent bout of risk appetite lasts. As we have seen, investors remain very skittish and responsive to negative news such as the Hungary issue to end last week. Bernanke's assessment of the economy and the China's trade news have at least temporarily beaten back the global economy bears.